Property insurance is a key component in any real estate investor’s business plan. Depending on the area of the country you’re investing in, property insurance costs can add many thousands to your annual property expenses—and in some areas of the country, these are rising rapidly.
Almost everyone knows by now that California and Florida are experiencing property insurance crises, with insurance increasingly scarce and/or unaffordable. This is, of course, ironic for investors because, in many other ways, these continue to be lucrative investment destinations.
Here, we’ll look for silver linings for investors in these states. (Spoiler alert: There are a couple.) We’ll also take an in-depth look at destinations that have traditionally been seen as “safe” from the insurance point of view, thanks to a more stable climate. We’ll see how this is changing and point to the factors investors need to be aware of when doing property research.
The Midwest Is No Longer Automatically ‘‘Affordable’’
Of all U.S. regions, the Midwest has been investors’ favorite for the last couple of years. There are many reasons for this, but they can be effectively summarized as the golden combination of affordability and relative stability. The reasoning goes like this: The Midwest may not be as hot of a market as the South, but it will deliver steady returns because people are keen to move there, and property prices are more stable.
This reputation is beginning to shift, however, with the Midwest now experiencing increased pressures on its property insurance market. The reason is a changing climate. The Midwest is experiencing more rain and more frequent and intense storms, resulting in more damage to homes.
According to the 2023 U.S. National Climate Assessment report, ‘‘More frequent and intense heavy precipitation events are already evident, particularly in the Northeast and Midwest.’’ It’s not just that the Midwest is getting more rain—annual precipitation has already risen by as much as 20% in some areas, according to the EPA. It’s the fact that heavy precipitation now tends to arrive all at once during extreme downpours.
The results are obvious: heavy flooding. Iowa, South Dakota, and Minnesota all experienced historic flooding levels in June 2024 following heavy rainfall.
Extreme weather patterns are affecting the Midwest in more ways than one, however. According to a recent study of observational data from 1951-2020, Tornado Alley is shifting. Since the middle of the last century, ‘‘tornado activity has shifted away from the Great Plains and toward the Midwest and Southeast United States.’’ While everyone knows to expect tornado activity in Oklahoma, Nebraska, and South Dakota, it increasingly includes places like Ohio, which recorded 71 tornadoes in 2024 so far.
Additionally, the Midwest is already prone to seasonal thunderstorms, with lightning and hailstorms. These, too, are increasing in intensity, which means that the hail is larger and causes more damage to infrastructure and property.
The impact on property insurance premiums is severe. According to the Federal Reserve Bank of Minneapolis, premiums increased by 34% over just seven years. Some states recorded even faster hikes, notably 41% in South Dakota, which is significantly more than the national average of 34% over the same time span.
When insurers aren’t raising premiums, they are reducing coverage. According to the report, increasingly financially stressed insurers ‘‘impose new conditions on coverage of common perils, such as wind and hail damage.’’
That’ of course, is because wind and hail ‘‘are second only to hurricanes in the damage they inflict,’’ which means they’re among the most expensive weather events for insurers. According to the National Centers for Environmental Information (NCEI), straight-line wind and tornadoes caused $246 billion in damage to U.S. properties from 2014 to 2023. Tropical cyclones, such as hurricanes, caused $695 billion in damage. While there’s a very significant gap between the costs of tropical versus nontropical weather events, the amounts are still huge.
What do Midwest investors need to be aware of?
Hail, in particular, is now being treated differently by insurers in hail-prone areas of the Upper Midwest (e.g., Minnesota). While hail used to be covered in the same way as other types of natural disasters, i.e., with a standard deductible, the deductible is increasingly tied to the current value of the home and is around 2%. That can have huge implications for how much an investment property is actually going to cost you.
Moreover, many insurers are refusing to provide full coverage for older roofs and are subtracting depreciation from the amount covered.
The other big thing that’s happening (not just in the Midwest) is that insurers increasingly rely on newly available data about extreme weather patterns and increase their insurance premiums accordingly. In the world of climate data, hyperlocalism is now the thing, which means that two houses on the same street may have different risk profiles for the same type of weather event.
If you get substantially different quotes on two properties that are nearby/in the same town, it’s worth digging into why. Chances are high that there will be a weather-related reason.
The California Property Insurance Crisis Deepens
The situation is much more dire in California, where insurers’ responses to the intensifying wildfires are increasingly extreme: They are canceling policies, refusing to issue new ones, or even exiting the state altogether. At this point, we are talking about an exodus, with these insurance companies (all subsidiaries of Kemper Corp.) announcing earlier in 2024 that they would not be renewing their California policies:
- Merastar Insurance Co.
- Unitrin Auto and Home Insurance Co.
- Unitrin Direct Property and Casualty Co.
- Kemper Independence Insurance Co.
In the meantime, large household names like State Farm, Allstate, Farmers, USAA, and Nationwide all announced that while they would not be leaving the California market, they would be significantly limiting new homeowner policies.
The exact implications of this overall trend vary by insurer. For example, State Farm has mainly gone down the route of not renewing the policies it perceives as risky, with 30,000 California policies affected as of 2024. In a statement from last year, the company said that it ‘‘made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”
Other insurers, notably Farmers, are limiting new applications or drastically increasing wildfire safety standards for new applicants, which is what USAA has done.
The California property insurance crisis is summarized by Bankrate as California homeowners ‘‘scrambling for coverage” or being ‘‘unable to find it.’’ Part of the problem is that California insurance rates have historically been lower than the national average, thanks to stringent insurance hike regulations enshrined in the Proposition 103 legislation. Under this law, insurance companies can’t raise premiums over 7% without first getting approval from California’s Department of Insurance.
What do California investors need to be aware of?
This used to be great news for homebuyers and investors: After all, who doesn’t want to pay less for their property insurance? However, as it turns out, this model works poorly for California’s ‘‘new normal’’ of wildfire risk. Insurers simply cannot afford the huge costs of repairing or rebuilding so many wildfire-damaged homes.
All this doesn’t mean that if you were planning to invest in the California market, you necessarily need to reconsider. But it does mean that you need to tread very carefully when choosing an investment property. The easiest way to mitigate the risk of your deal falling through because you can’t find insurance is by buying a home that already meets California’s fire-hardening building codes, which have been in place since 2008.
However, if you are buying a home in a fire-prone area that was built before 2010, the seller, by law, has to give you a written summary of an inspection report confirming whether the home meets current standards and what fire-hardening features it has. If it does not meet the standards, you have the right to refuse to close on the home.
These are useful strategies for new investors. If you already own a property that’s near a wildfire risk area that was in a state of emergency, your insurer cannot cancel your policy for at least a year, which gives you time to explore other options.
Investors should also be aware of the fact that wildfire-related problems and risks are not confined to California, even while it continues to be the epicenter of the crisis. Pretty much the entire West Coast is now grappling with the same issues, with Oregon and Washington developing property insurance crises of their own. Other states to watch include Colorado and Montana, where intensifying wildfires are causing soaring premiums.
Florida May Be En Route to Improvements
No other state has had it worse than Florida when it comes to the property insurance crisis. Florida has lost coverage from some 30 providers in the past few years, with over 10 going into liquidation since 2017. The difficulties Florida homeowners face when trying to find property insurance have become legendary.
As in Midwestern states, roof damage from intensifying extreme weather events is the main factor in Florida’s insurance troubles. Of course, hurricanes are to blame for torn and destroyed roofs in Florida and parts of Louisiana rather than tornadoes or hailstorms.
Many nonrenewals and cancellations we’ve seen over the past several years have cited roof age as the reason. There is new legislation on the homeowners’ side, however, which stipulates that companies cannot refuse insurance if a roof is less than 15 years old and has a life expectancy of five years at the time the policy is issued. And even if the roof is over 15 years old, if an inspector determines it has another five years, the homeowner may still be able to get coverage.
While there are signs that Florida is at least beginning to tackle its property insurance crisis with meaningful legislation, things are actually looking messier in neighboring Louisiana. This hurricane-affected state has had a unique three-year rule in place since Hurricane Katrina, which prohibits insurers from canceling or nonrenewing policies that have been in place for three years or longer. However, Louisiana has just relaxed this rule: It will not apply to policies taken out after Aug. 1, 2024.
Technically, insurers won’t be able to cancel more than 5% of policies that are issued on homes in the same parish. In practice, however, insurers will be able to apply for permission to cancel more policies from the state insurance commissioner.
It remains to be seen how many policies will be nonrenewed or canceled, but if you are thinking about investing in southern Louisiana, you will need to be extra careful.
Final Thoughts
When we say, ‘‘be careful,’’ we mainly mean ‘‘do your research.’’ It’s much better to acquaint yourself with what’s going on in a local insurance market before just wading into it. And you need to adopt the same strategy insurers now commonly use to decide which homes are insurable.
This strategy is granular and hyperlocal, with each home assessed individually. Remember: Even properties on the same street can have different risk profiles based on past extreme weather events. There’s a wealth of information available online about climate risk, but you should also speak to insurers directly when looking at multiple properties in a specific area.
This article is presented by Steadily
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.